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Evaluating The Two-Income Trap Hypothesis:

As I've been working on my book on bankruptcy this summer, I've been going back through the various hypotheses that have been advanced for the rise in American bankruptcy filings in the 1980s and 1990s. One hypothesis was that advanced in The Two-Income Trap: Why Middle Class Mothers and Fathers are Going Broke by Professor Elizabeth Warren and Amelia Warren Tyagi.

Warren & Tyagi's argument can be easily summarized. They focus on the rise in the number of households with two parents working as an indication of economic distress. Conventional economic theory would indicate that one benefit of having a second wage-earner is that it will make the family more resilient to a financial setback or loss of job than a traditional family with only one wage-earner. Families today, unlike those a generation ago, can save the second earner's income as precautionary savings, thereby making it easier to withstand a setback.

Warren and Tyagi disagree with this conventional economic approach.

[To continue reading hidden text click "show"]

DavidBernstein (mail):
Is there any actual evidence that housing prices in "good" school districts increased at a faster rate since the 1970s than housing prices in "mediocre" "fair" or "poor" school districts?
8.6.2007 9:46am
LizardBreath (mail):
Given that we're talking about two-income families, it probably makes sense to talk about the tax hit they take in terms of the marital penalty, in which the incomes of a married couple are added, and so result in a higher tax rate than two single people with the same incomes would pay.
8.6.2007 9:48am
Zywicki (mail):
David--No. It is simply asserted in the book.

LizardBreath--I agree. I figured the post was excessively long already, but that is another policy conclusion that presumably would follow from the findings.
8.6.2007 9:51am
Boyd (mail) (www):
Just to play devil's advocate, one could make the argument that the increase in taxes was caused by the increase in income, so it's really an effect, not a cause. Although if that's the argument, it should be plainly stated.

In the end, though, an increase in income tax is definitely not what drove Kimberly into the workforce. Personally, I believe ("believe" = "I have no facts to back this up, so I'm making it up as I go along") that the bigger house/nicer car(s) are merely part of the larger phenomenon of "buy more and costlier stuff" we've experienced over the past 30 years.
8.6.2007 10:13am
Richard Aubrey (mail):
W &T may--possibly may not be--surprised to hear they are supporting Dr. Laura's idea that moms should stay home and take care of the kids. You make the economic sacrifice to do it. Now we find that two-income families aren't any better off.

Not so, of course. For their extra expenses in housing, they get to live in a better house. Try remodeling sometime and see what the new codes require.

When I was a kid, my family moved into the starter house that the WW II vets were going into by the millions. Three bedrooms, one bath, finish the basement yourself, crawlspace above, small lot. Everybody thought it was terrific. Considering what the adults knew of how young families had had it in the Thirties, which is to say the Depression.

Later, after building up equity rapidly in the standard fifteen-year mortgage, we and everybody else moved to the got-it-made house, which by today's standards wasn't all that much.

Problem is, if you were born after about 1950, as a boomer, your standard was the got it made house. You have no idea that we never felt oppressed or poor. We were having a ball in the early subdivisions.

Succeeding generations insist on higher standards of living, which cost more money. There is a price.

But the accidental support for Dr. Laura is a hoot.

If mom stays home, she can home-school and so the quality of the neighborhood school doesn't matter.
8.6.2007 10:16am
anomdebus:
Can I assume the dollar figures mentioned are adjusted for inflation?
8.6.2007 10:20am
Steven Horwitz (mail) (www):
Todd -

Your hypothesis that taxes might be behind some of this seems right to me. But distinguish two things - higher taxes can't explain why women are working, but it can explain why, given that women (really: secondary earners, who are mostly women) wish to work, how even a second income doesn't net much income at all. One of the best sources on this is Ed McCaffery's "Taxing Women". The problem he discusses is *not* the "marriage penalty" but the "secondary earner bias."

If a wife goes to work, all of her income is taxed at the marginal rate, which is higher, of course, than the average rate the husband (really: primary earner) is taxed at. After that, her work implies a variety of expenditures, which you have noted in your post, none of which are fully deductible as business expenses. McCaffery argues that two changes to tax law would lower the "costs" of having a secondary earner:

1. Allow married couples to treat their individual income separately and tax it at the rate applicable to unmarrieds, avoiding the higher marginal rate for the secondary earner. (Of course a flax tax would solve this problem too.)

2. Allow secondary earners to treat the expenses associated with working to be fully deductible against their income, especially child care.

Finally, the most compelling reasons for increased female labor force participation have to do with the higher levels of human capital that women have achieved combined with the decreasing amount of labor required for household production. The opportunity cost of entering the labor force has declined dramatically. There's no evidence that reduced male incomes explain it. In fact, the wives of higher-earning men are more likely to be working than those of lower-earning men, although that's mostly assortative mating.
8.6.2007 10:22am
Dan Weber:
If we're gonna say that dual-income households leads to a bidding war for housing, why not also say that all those women taking jobs is what's leading to our unemployment?

That is, of course, total bunk, because there's not a fixed-size lump of labor sitting around.

I'd buy that there was a bidding war going on for "Ivy League college education." Because the number of seats open at Elite Colleges is pretty much constant. (Your definition of an "elite college" will vary, but that's fine -- however you define it, there are only slightly more slots open in today's admission class of those colleges than there were 20 years ago.)

But what evidence do we have that there is only a certain fixed-size lump of "good places" to live? Schools are the primary key, but there are new and highly-regarded public school systems that barely existed, if at all, 20 years ago. So the supply of them is surely increasing.
8.6.2007 10:28am
Zywicki (mail):
anomdebus: Good catch. The excerpt mentions "inflation-adjusted" but on rereading, it is ambiguous whether it is all inflation adjusted, so I've clarified that.
8.6.2007 10:45am
TMac (mail):
I commented to my wife, who entered the work force late, that she went to work so she would have extra money to buy clothes to go to work in.
8.6.2007 10:45am
Stacy (mail) (www):
There is something to the previous comment about social pressure to buy bigger and better everything, from houses to cars. What's considered an entry-level townhouse today is larger in square footage than the 1960s-vintage two-story detached house I grew up in, which in turn was nearly twice the size of the Levittown-era cape cod. New detached houses in the DC area are pushing 3000-3500 square feet, or four times the size of the houses those postwar families lived in, all while both the average family size and the percentage of households with children is sinking like the Titanic. I don't really believe there's any kind of deus ex machina making families worse off even though they have twice the income. They're doing it to themselves.

You also have to consider the effect of a household having its entire life savings invested into its mcmansion, which is considerable. Among other things, it becomes politically impossible to fix housing shortages by allowing higher density, because the apartments and condos have to go next to someone's house and nobody wants to take the hit (real or imagined) to their property value.
8.6.2007 10:55am
Houston Lawyer:
I believe that there is an overall tendency for couples to overspend these days. If you have two incomes, you have twice the opportunity to lose a job.

I think that couples where the wife, out of choice, stays home to raise the kids are more likely to be conservative financially. They have made a choice to live on a lower income in exchange for the other tangible benefits that they perceive from that life style.

I don't think we have to go into the whole bidding war scenario to explain the statistics. I didn't enjoy Liz Warren's bankruptcy class at UT.
8.6.2007 10:55am
Truth Seeker:
I know this isn't the point you're looking at, but part of the reason bankruptcies went up in the 1980s is that there suddenly appeared on the market do-it-yourself bankruptcy kits and paralegal services that made filing easier, cheaper and less terrifying than going to a lawyer. Is there any evidence on what percentige of bankruptcies were pro se for each year?
8.6.2007 11:00am
Malvolio:
I commented to my wife, who entered the work force late, that she went to work so she would have extra money to buy clothes to go to work in.
In general, how exactly do a larger house, a second car, nicer clothes, and private school become part of the "cost" of being a two-income family? Aren't those the benefits?

All those things that Warren &Tyagi dismiss as "basic expenses" seem to be reasons that people work. What was W&T hoping we would spend the money on, cable TV?
8.6.2007 11:10am
Barbar:
Don't taxes drive down the prices of goods? Consumers can only bid for goods with after-tax dollars.

Clearly the improvement in income is overstated due to taxation.
8.6.2007 11:16am
BladeDoc (mail):

I commented to my wife, who entered the work force late, that she went to work so she would have extra money to buy clothes to go to work in.


Tmac -- how's that black eye coming along, anyway?
8.6.2007 11:20am
ChrisIowa (mail):

The excerpt mentions "inflation-adjusted" but on rereading, it is ambiguous whether it is all inflation adjusted, so I've clarified that.


Inflation adjusted to what year? It would appear to current or near current dollars. I made nowhere near $30,000 in 1973, just out of college.

Are the incomes used in the example median or something else? Income figures for the example should be weighted to reflect families just starting out, rather than a median for example, as that's when the initial decision is made as to whether the wife should work.

From the young 'uns I work with, I have to wonder if there is really any economic analysis in the decision. It seems they make the presumption of the wife working and don't analyze the economics.
8.6.2007 11:24am
Atlantic06 (mail):
I think this is largely hogwash, for many of the reasons stated in the comments above.

But what I really wonder, is how many people in the 1970s lived within walking distance of shopping? I didn't, and neither did my single-wage earning parents in the 1950s (we lived, two parents and three children, in a two bedroom-one bath house of about 900 sq. feet). I remember going "downtown" with my mother on a bus -- try that today.

The fact is we live incredibly better in a material sense than we did at mid-twentieth century(or even 35 years ago). You can argue that we could live cheaper without multiple bathrooms, DSL or dishwashers (the mechanical kind), but there seems no desire on the part of anyone to give up these "basics" of modern life.
8.6.2007 11:26am
Stacy (mail) (www):
Malvolio: "In general, how exactly do a larger house, a second car, nicer clothes, and private school become part of the "cost" of being a two-income family? Aren't those the benefits? "

For the reasons stated in the post. In the good old days that nobody remembers with anything resembling accuracy, the single-earner family typically had one car, which the husband used to commute to work except on days when the wife needed it to do the shopping, in which case she had to drop him off at work and pick him up later. The arrangement worked for most people because both work and shopping were located downtown.

In your typical two-earner family today, work and shopping are probably nowhere near each other and there isn't enough time in the morning to get the kids out the door and drop one parent off at work. They need two cars. When the kids get old enough to drive, it becomes compelling to buy a third car because, again, there just isn't time to drive the kids everywhere they need to go (and they can't get there on the bus or on their bikes)
8.6.2007 11:42am
luispedro (mail) (www):
"""Whereas the book presents all of the other figures in terms of dollar values, expenditures on taxes is presented in terms of percentages. This stylistic decision unfortunately makes it difficult ot recognize that this increase in taxes is the primary factor causing the drop in "discretionary income" between the two time periods."""

From the author's point of view, that's probably a feature, not a bug.

I'll go on a ledge, but these kinds of theses (middle-class families are squeezed) tend to presented as evidence for *more* tax progressivity. It kind of defeats the purpose to then state that the biggest squeezer is the federal government, doesn't it?
8.6.2007 11:55am
ChrisIowa (mail):

the single-earner family typically had one car, which the husband used to commute to work except on days when the wife needed it to do the shopping, in which case she had to drop him off at work and pick him up later.


Or (as with my parents) he would carpool, and she would have the car half of the time. But that didn't matter for grocery shopping, because the grocery store delivered.
8.6.2007 12:04pm
cathyf:
1. Allow married couples to treat their individual income separately and tax it at the rate applicable to unmarrieds, avoiding the higher marginal rate for the secondary earner. (Of course a flax tax would solve this problem too.)
Just a note that while a real flat tax would have that effect, nothing which any politician has called a flat tax is in fact flat in that way.

A progressive tax (or regressive tax, for that matter) is created by having more than one tax rate at different levels of income. So take the "income tax". You have deductions, and so the first rate is zero. Then the next rate is 15%, then 25%, then 28%, etc. The marginal tax rate is increasing, therefore the tax is progressive. Then take the "social security tax" which is called the "self-employment tax" for a lot of people. It's 12% for the first $90-some-thousand in income (indexed for inflation) and then zero after that. The marginal rate is decreasing, so the tax is regressive. The "unemployment tax" is another regressive tax. Then take the medicare tax -- it's the only real flat tax out there, where every dollar earned from the first to the billionth and beyond is taxed at the same rate.

Because of the fact that people's taxes are the sum of progressive taxes, regressive taxes and flat taxes, whose functional shapes differ, and because of the byzantine nature of the "income tax" part of the tax code, individual families all face different regimes of deductions, etc., and so face marginal tax rates which bounce up and down all over the place -- sometime progressive, sometimes regressive, and subject to change as the tax code changes and their family circumstances change over time.

Every single proposal that I have seen called a "flat tax" keeps social security &unemployment taxes as regressive taxes while having at least two tax rates creating a progressive "income tax". Having a big deduction (which all the "flat" proposals have) means that there are two rates -- zero and whatever the rate is on income above the deduction. Two or more rates means that the tax cannot be flat -- that's simply the definition of flat.

For the purposes of this discussion, the only way that a "flat tax" would be family-status neutral is if only wage-earners got deductions. If the deductions flow to the family according to family size, then the second wage earner pays the flat tax + regressive tax, while the first earner pays the progressive tax + regressive tax.

If anything, the discussion points to the fact that for the stereotypical "middle income" family, the wife is the prototypical flat-taxpayer. Take my family... For most of my married life I was self-employed. We would get all of the deductions whether or not I worked, and my husband's income put me into the 28% bracket for all of my income, and I never made enough to get past the maximum for social security. Add 15% for social security &medicare, and then state income tax. Round numbers, my flat tax was 50%. Whenever I was considering a deductible business purchase, I always assumed a 50% tax rate.
8.6.2007 12:14pm
K Parker (mail):
Atlantic06
I remember going "downtown" with my mother on a bus -- try that today.
I have, works just as well as it did in the early 60's. Umm, scratch that--it works better. I don't think anyone regards Pierce Transit as a marvel of modern mass transit, just an average public bus system in an average area, but it has much better coverage of outlying areas and suburbs than it did when I was growing up. (Much higher subsidies, too, I suspect, but it's not my intention to get anyone's libertarian juices flowing on that tangent, least of all mine.)
8.6.2007 12:31pm
Don Miller (mail) (www):
Real life example from my personal life.

After my son was born, my wife and I sat down to crunch the numbers. She doesn't have a college-education, so she is limited in the types of jobs and salaries she can get.

She was working for the State in a decent position.

If she worked, her salary was going to pay for two things, 1. day-care, 2. the car payment on her car.

We sold the car and she stayed home with my son. Our budget was definately a lot tighter after the child was born than before the child, but it was going to be tighter anyway.

We chose to live in a small 2 bedroom home with a 1 car garage. We cut up all our credit cards. We paid off all of our personal debt. We make a new budget every month and hold ourselves accountable to it.

That was 10 years ago. We have a lot more money in the bank and our IRA/401Ks than our friends do. We go on nice vacations. We paid cash for our last used car. When our friends and family complain about how terrible the economy is, we smile and make sympathetic noises, but inside we are giggling.

Our situation is not unique. I know lots of 2 income families where the wife has a low paying job that doesn't even cover her daycare expenses and the family feels that they can't possible afford to have her not work because "daycare is so expensive". It baffles me.
8.6.2007 12:32pm
Dan Weber:
The second job may also provide health care for the second worker. Family coverage (at competitive rates) isn't a given these days.
8.6.2007 1:03pm
Taeyoung (mail):
The argument is a bit opaque, but it seems to rest on the idea that recent decades have seen an excessive "bidding war" for housing, as families compete to get their children into preferred school districts.

Out of curiosity, taking into account fees at average boarding schools (which I don't know), how much could sending children away to boarding school compensate for the hit from living in expensive, high-quality school districts? I don't know what any of the numbers involved are (I did not attend a boarding school, do not have children, and do not own a house in an expensive, high-quality school district), but I'm a bit curious whether that's something we can expect to see in the coming years. If, that is, their analysis has some truth to it (Zywicki's critique notwithstanding).
8.6.2007 1:10pm
neurodoc:
I wonder if some possible benefits to having a second worker in the family are overlooked:

While the second worker may not bring in as many $s as the first, and having a second worker may occasion substantial expenses that could otherwise be avoided, e.g., daycare and transportation, the second worker may add much value through employment benefits, especially health insurance. Not hard to imagine a lawyer, doctor, accountant, etc. who earns a good income but who would have to pay a good deal for not such good health insurance if spouse, who brought home less money and occasioned those substantial expenses that could otherwise be avoided, did not get good insurance benefits from their employer.

In addition to the possible health insurance benefit, might there not be another valuable, though hard to quantify "insurance" benefit, namely assurance of future employability of the secondary worker? It is generally easier to get a job if one already has a job than if one doesn't. And it is almost always easier to get a job, especially a well-paying, satisfying one, if one hasn't been out of the workforce for an excessively long time. So when the second person, usually the wife, works, they have both the current employment and future, hard to value, possibilities that might not be there should the need or desire to work come years later. If that need or desire to work never comes, then it can be looked at in retrospect the same way one can look at a property insurance policy they never collected under.
8.6.2007 1:17pm
aces:
I attended a decent boarding school in the Midwest. Last time I checked (a few years ago), tuition + room and board was in the low-to-mid-$20K/year range, comparable to an average private liberal-arts college. I would expect about the same range today.
8.6.2007 1:27pm
neurodoc:
If I may here, a slightly OT bankruptcy question for bankruptcy types:

Imagine (unfortunately, I don't have to imagine it) a family member who has always been, and no doubt always will be, profligate, wins the lottery and gets a stream of annual payments for 20 years. They now see themselves as well-off and go about incurring credit card debt that puts them deeper and deeper underwater, as the relatively generous annual payments to them remain fixed, while their spending doesn't. (The details of how they go about are too painful to recount, even though they are not a first-degree relative or otherwise all that close.) With a negative "current" net worth, that is liabilities well in excess of "current" assets (not including lottery winnings for a few more years and prospect of a small inheritance), is personal BK an option for them to investigate? Would the prospect of more annual payments to them be reduced to present value, or factored into a repayment schedule? After the changes to BK law so as to keep people from walking away from recklessly incurred credit card debt, is personal BK out of the question as a possible solution here? (BTW, no need to consider a second wage-earner in this "hpothetical," since after winning the lottery, the couple figured neither needed to work thereafter, and subsequently divorced?!)

[Professor Zywicki, if you need any BK "parables" for your book, I could give you more details. Not too different from Aesop's fable about the ant and the grasshopper, though.]

Has destigmatization of BK been considered as one cause of increased numbers of filings?
8.6.2007 1:41pm
DeezRightWingNutz:
neurodoc hit on a great point. In many jobs, espcially white collar professions, a prolonged break from the workforce hampers earnings once the worker returns. I know many people who probably work for $2-$5/hour after netting wages, taxes, and daycare expenses. The big financial payoff is in thirteen years, when daycare stops and you've moved up the ladder relative to the forty year old housewife/husband just entering or re-entering the workforce.

I do agree with the author's claim that many two-income households are at risk of financial ruin than their one-income predecessors, at least for a specific subset of them. Those who live paycheck to paycheck (many people I know have a marginal propensity to consume of 100%) are quite obviously at higher risk of disaster, because their household is about twice as likely to experience a job-loss as a single-earner.
8.6.2007 1:43pm
Don Miller (mail) (www):
Neurodoc:

According to the US Census (2005), only 27% of the US population has a 4 yr college degree or higher. For the vast majority of Americans, that 2nd job is going to be a lower wage job.

For a family where both spouses are college educated, your arguments make sense. But those are going to be a minority of the families.

Honestly for most people, it is an emotion driven argument rather than an economic one. The average couple doesn't even consider making a budget and examining how their career choices are impacting the family. All their friends work, so they want to work too. It is more of a peer pressure-social expectation type decision.
8.6.2007 1:43pm
Don Miller (mail) (www):
About the time I was in college (14 years ago), I saw an economic analysis that compared the average salary to the number of two income families.

I have been looking this morning and can't find it, but the result the person was trying to demonstrate was that pay scales have been going up slower as the number of two-income families increased.

The paper claimed there was two reasons for this.

1. Because more women stay in the work force there are more people chasing fewer jobs. Employers don't have to offer as much money to find a satisfactory number of applicants.

2. The primary money-earner in single-income families tends to be more aggressive in asking for and pursuing raises. They feel more pressure to raise their families standard of living when they are solely responsible for it.

I remember my microeconomics professor ripping on the methodology of the paper and the results. She had to admit that the numbers seemed to support the first conclusion, but the second one was pure conjecture.
8.6.2007 1:52pm
Atlantic06 (mail):
Deez: "Those who live paycheck to paycheck . . . are quite obviously at higher risk of disaster, because their household is about twice as likely to experience a job-loss as a single-earner."

But the consequences of job loss for the single-earner living paycheck to paycheck is likely more than twice as catastrophic.
8.6.2007 2:25pm
A.C.:
Are people at the average income level the ones competing for houses in the best school districts? In urban areas, I would think not. I suspect that the phenomenon is concentrated among two-income families in the top 20% of the income distribution.

Among post-boomer couples in that demographic, the wives earn more money in many (sometimes I think most) of the families I know. But somehow nobody ever thinks that the choice their husbands make to work is strictly economic, and that their husbands should stay home if day care and commuting costs are too high. Something else is in play there.
8.6.2007 2:58pm
DeezRightWingNutz:

But the consequences of job loss for the single-earner living paycheck to paycheck is likely more than twice as catastrophic.


They are? In terms of the risk of personal bankruptcy?

I've posited :

1) savings = $0, and
2) monthly expenses = monthly income (i.e. paycheck to paycheck)

Granted, the high-spending two-income household could probably cut expenses more than the one-income household. But they'd better be able to cut expenses by 50% immediately, which is unlikely. When cash flow is negative and net worth is zero, insolvency comes quickly. I'm shocked by how many 40-something, dual-income, upper-middle-class households would be insolvant withing a month or two if one person lost a job. In fact, I think that the one-income household may be able to weather unemployment more easily in many cases. In effect, they have excess earning capacity. While the stay-at-home spouse may have limited earning potential, s/he can often find some sort of work in a pinch.
8.6.2007 3:04pm
tvk:
The ignorance of standard economic theory reflected by this book is shocking. It is a reminder of the "if we keep all the women home male wages will go up to compensate" theory that I thought was debunked years ago. When women go into the workplace, they increase the overall productivity in society -- by exploiting their comparative advantage as workers than as homemakers. Thus, the theory that housing price increases will suck up all the increased wages, at least on an economy wide scale, is clearly wrong.
8.6.2007 3:07pm
Mike Keenan:
"The ignorance of standard economic theory reflected by
this book is shocking"

Are these two authors even economists? Their arguments don't seem like the kind serious economists would make.
8.6.2007 3:20pm
Jake (Guest) (mail):
If we really want to make the economy take off, women should not only stay home from work, they should spend their free time breaking windows in their neighborhood. Think of the boom in the glassmaking business that would ensue!
8.6.2007 3:37pm
DRJ (mail):
As someone with a front row view of bankruptcy filings in my geographical area, I offer the following regarding the average bankruptcy filer:

1. Most bankruptcy filers in my area are high school graduates that got in financial trouble using credit cards and buying vehicles and consumer goods beyond their means.

2. Their stop-gap method of dealing with financial problems was to stop paying their vehicle/home loans, insurance premiums and federal taxes. This worked in the short term but it ultimately caught up to them with repossession or foreclosure proceedings, IRS garnishments or an uninsured event that affected their health care, vehicle, or home.

3. They filed bankruptcy based on the recommendation of a family member, friend, or coworker who had previously filed. They typically use the same attorney as their family member, friend or coworker. A surprising number are repeat filers (within the past 10+ years), often with the same attorney.

4. Some bankruptcy filers encountered an unusual event - e.g., a medical event that disabled the sole wage-earner in families where only one spouse works outside the home - that resulted in bankruptcy. Under the old law, these filers were more likely to file a Chapter 13 bankruptcy even though their ability to repay was questionable. In general, their desire to repay their debts seemed greater than the average filer. It's too soon to see any pattern under the new bankruptcy laws.

5. Some bankruptcy filers' financial problems are related to the cost of addictions to drugs, alcohol, tobacco, and/or gambling - costs that aren't shown in the bankruptcy documents but become apparent in questioning at the 341 meeting. A few arise from job loss due to incarceration of one spouse, and many more are brought on by one or both spouses' inability to pay delinquent child support payments.

6. The type of debt listed in the bankruptcy Schedules does not tell the whole story of why a debtor filed bankruptcy. The overall problem may have been caused by overspending on new vehicles, consumer goods and/or credit cards. However, the unpaid debts are often secured debts like car payments, home loans, and federal taxes because, unlike consumer creditors, secured &priority creditors have not historically been aggressive regarding missed payments. Many debtors basically rob Peter to pay Paul and thereby get behind on taxes or car/home loan payments to finance expensive consumer credit agreements, only to ultimately file bankruptcy when they can't catch up on their delinquent secured &priority debts.
8.6.2007 4:06pm
theobromophile (www):

In addition to the possible health insurance benefit, might there not be another valuable, though hard to quantify "insurance" benefit, namely assurance of future employability of the secondary worker?

Agree with NeuroDoc. Adding to it: the expenses of day care are temporary. Both parents will see an increase in their salaries as they gain experience. It's not just the insurance of a second income: it's the fact that the second income will be substantially larger than it would have been if the woman stayed at home for 15 years. Expenses associated with that income (car, childcare, etc) will either remain constant (i.e. car) or decrease (high schoolers don't need daycare) - either way, they will represent a smaller portion of the second income as the couple ages.

Did the authors account for the fact that more women than men go to college these days? Did they account for the high divorce rate?
8.6.2007 4:11pm
DWAnderson:
If the authors' story were taken at face value, it would be an argument for school choice-- decoupling the schools ones children go to from the place they live. This would avoid excessive resources being sunk into housing in the pursuity of better schools for their kids. Do the authors advocate this?
8.6.2007 4:25pm
wooga:
What I wouldn't give for a $9,000 a year mortgage! In San Diego, $30,000/year _might_ get you a 1,000 square foot condo.... if you don't mind the blood stained walls.
8.6.2007 4:32pm
Jam:
As a single paycheck family (13th year of home schooling 4 children) I can tell you that my wife now is grading SAT essays to help with expenses. We have no savings to speak of. Our property taxes (Houston, Texas) have almost doubled in 7 years, my paycheck has not seen an increase because health insurance eats it first.

We cannot afford vacations. We barely eat out and I always pack my lunch. We do curb shopping and are amazed at what people throw away that could be fixed with less than $5 and very little time.

Today's families, by law, must have auto insurance. Was that true in the 1970s?

The dollar has been devalued and does not buy as much as the 1970s family.

Everything seems geared to force families into a double-income, small family arrangement. I wonder if we can sustain the 1 paycheck for much longer.

Richard Maybury's Whatever Happened to Penny Candy is a good primer into economics.
8.6.2007 5:08pm
David M. Nieporent (www):
But the consequences of job loss for the single-earner living paycheck to paycheck is likely more than twice as catastrophic.

They are? In terms of the risk of personal bankruptcy?

I've posited :

1) savings = $0, and
2) monthly expenses = monthly income (i.e. paycheck to paycheck)

Granted, the high-spending two-income household could probably cut expenses more than the one-income household. But they'd better be able to cut expenses by 50% immediately, which is unlikely.
More likely than cutting expenses by 100% immediately, no? Because that's what would have to happen in a one income household that met your two criteria above.

The two income household which loses half its income could cut all the expenses identified by Prof. Warren. (Child care, second car, etc. And of course the extra taxes disappear when the income does.) The single income household doesn't have that slack to cut.
When cash flow is negative and net worth is zero, insolvency comes quickly. I'm shocked by how many 40-something, dual-income, upper-middle-class households would be insolvant withing a month or two if one person lost a job. In fact, I think that the one-income household may be able to weather unemployment more easily in many cases. In effect, they have excess earning capacity. While the stay-at-home spouse may have limited earning potential, s/he can often find some sort of work in a pinch.
Why wouldn't the same consideration apply in a two-income family in which one of the spouses was laid off?

Your argument is based upon the notion that dropping from $60 -> $30 is more painful than going from $30 -> $0, which seems hard to credit. (In any case, even if that is true, you're arguing that an irresponsible two income family is worse off, not that an average two income family is.)
8.6.2007 5:11pm
David M. Nieporent (www):
As Malvolio notes, at least part of the Warren argument is silly; the idea that a second car is part of the 'cost' of a second income is strange. Does she remember what it was like for housewives who didn't have cars? Even if shopping was within walking distance -- and that was hardly guaranteed -- it was kind of a crappy lifestyle. For one thing, even if you have a cart of some sort you're still limited in how much you can buy when you walk to the store. Which meant more trips, more time spent on housework. For another, no matter where you are, not all stores -- let alone other destinations one might wish to visit -- are within walking distance. People buy two cars nowadays whether they have two incomes or not, because in most places it kind of (to use a technical term) sucks to have only one car. (Of course, there are places where mass transit makes it less important to have that second car -- but in those cases, people don't need the second car for work, either.)

And speaking of that bit of sleight of hand, there's another bit of slipperiness in the Warren theory:
Health insurance is another must, and even with Justin's employer picking up a big share of the cost, insurance takes $1,650 from the couple's paychecks.
Warren posits an increase in health insurance costs. That may or may not be, but it has nothing to do with the "two income" issue.
8.6.2007 5:28pm
Jam:
On cars: We buy used cars for cash. The cost is in repairs, which are done as money allows, but there are no loan payments.
8.6.2007 5:35pm
happylee:
I think you would have to be nuts to send your kids to any public school anywhere in this country. Problem is that you can't buy in a cheap neighborhood and pay for a nice boarding school (like my parents did) anymore because poor neighborhoods are now dangerous places to live. That wasn't always so, but a couple of decades of gov't "planning" turned once wonderful poor neighborhoods into horrible places to live and work. (Does anyone remember when places like Newark or Detroit were desireable places?? Heck, even the South Bronx was once a middle class paradise.)

The long post is excellent and I think the impact of taxes on the "middle class" needs more formal academic exploration. Ironic that our ever-growing gov't funds the very social ills that makes middle class life difficult while at the same time draining the life out of the middle class. And these very same middle class citizens then go to polls to vote for....more gov't. Very sad. Vote Ron Paul.
8.6.2007 5:46pm
IB Bill (mail) (www):
I think there are too many assumptions in this to draw, er, broad conclusions.

Real estate prices exploded a few years back because of lower interest rates; too much money chasing too few goods. There was a similar jump in prices in areas with good schools previously, probably because of competition cited here.

What bugs me, however, is that college-educated couples are often paying beaucoup bucks to buy a house that a factory worker used to live in two generations back. Sure, it's outfitted better. But still ... anyone ever feel like our society's sort of running in place, you know, like the end of Gatsby?


Most of the big shore places were closed now and there were hardly any lights except the shadowy, moving glow of a ferryboat across the Sound. And as the moon rose higher the inessential houses began to melt away until gradually I became aware of the old island here that flowered once for Dutch sailors' eyes - a fresh, green breast of the new world. Its vanished trees, the trees that had made way for Gatsby's house, had once pandered in whispers to the last and greatest of all human dreams; for a transitory enchanted moment man must have held his breath in the presence of this continent, compelled into an aesthetic contemplation he neither understood nor desired, face to face for the last time in history with something commensurate to his capacity for wonder.

And as I sat there brooding on the old, unknown world, I thought of Gatsby's wonder when he first picked out the green light at the end of Daisy's dock. He had come a long way to this blue lawn, and his dream must have seemed so close that he could hardly fail to grasp it. He did not know that it was already behind him, somewhere back in that vast obscurity beyond the city, where the dark fields of the republic rolled on under the night.

Gatsby believed in the green light, the orgastic future that year by year recedes before us. It eluded us then, but that's no matter - tomorrow we will run faster, stretch out our arms further... And one fine morning -

So we beat on, boats against the current, borne back ceaselessly into the past.
8.6.2007 5:48pm
neurodoc:
Your argument is based upon the notion that dropping from $60 -> $30 is more painful than going from $30 -> $0, which seems hard to credit.

I don't know what would/wouldn't happen it your hypothetical cutpoints, but taxes on X would probably be <50% of those on 2X, and certain means-based benefits (welfare, Medicaid) that weren't available at 2X might kick in at X. So not a straight linear equation with no discontinuities.
8.6.2007 5:50pm
theobromophile (www):

Warren posits an increase in health insurance costs. That may or may not be, but it has nothing to do with the "two income" issue.

Actually, it does: but it may be less expensive to have two people working when both get health insurance through an employer. They can then choose the least expensive plan, or put the kids on the one that is least expensive. Furthermore, if/when one spouse is laid off, the other can simply add the rest of the family to her policy, rather than paying something like $300 per month per person for COBRA.
8.6.2007 5:55pm
neurodoc:
BTW, back in his day, which was long before modern BK law, Maimondes observed that poverty was more difficult for those who had previously been relatively well-off ($60K -> $30K) than for someone chronically poor ($30K -> $30K). More psychological than actual perhaps, but not to be dismissed as irrelevant I think.
8.6.2007 5:59pm
Surfing guy:
We need women in the workforce to sustain our entire economic structure now, because it's mostly the men who spend the workday posting comments to blogs. :-)
8.6.2007 6:04pm
PaulD (mail):
I think that there are lots of insightful comments here. One thing I think worth mentioning is the wide disparity in real estate prices depending on region. Where I live (Cincinnati, Ohio) it is possible for a person with a upper-middle income (less than $100,000 per year) to live in large house (e.g. 2800 square feet) in an affluent neighborhood with outstanding schools. A similar house on the coasts near a large city I suspect would cost well over 1M and would require two high-end professional incomes to purchase.
If the two income hypothesis is correct, then I think you would see regional disparities in bankruptcy filings depending on the real estate market.
8.6.2007 6:16pm
theobromophile (www):

If the two income hypothesis is correct, then I think you would see regional disparities in bankruptcy filings depending on the real estate market.

Presumably, as well, you would see a higher bankruptcy rate among middle-class homeowners.
8.6.2007 6:34pm
Mark Buehner (mail):
This argument is always rife with politically correct assumptions- its assumed families are moving to more expensive districts to get their kids in better schools, and while this is a factor it doesnt come close to explaining the typical American consumerism that accompanies this (and lack of saving/investment). While we might by that a family has to overextend to live in a nicer neighborhood, do they need a big house, or would a condo do? How many children share bedrooms in this day and age? Is an expensive SUV necessary compared to a KIA minivan? Dont get me started on Hot Topic and Playstation 3 and DirectTV.

Now of course there is nothing wrong with any of these wonderful things- but somehow they have gotten catagorized into 'necessities' for a middle class family (heck, what percentage of households below the poverty line have 3rd generation video consoles?). Its not just that every family is 'entitled' to a nice school district, they also must have all the trappings of middle classdom that keep their kids from feeling left behind (god forbid their self esteem might suffer).

Somehow when i see both parents driving off to work in the morning in nice cars (there are buses in the suburbs, believe me), swinging by Starbucks for a 5 dollar cup of coffie, I dont shake my head sadly at how the quest of educating their kids has forced both parents out of the home.
8.6.2007 6:57pm
Jim,MtnViewCA,USA (mail):
It seems clear that wasteful gov't spending has a visible and significant effect in dampening the economy.
8.6.2007 6:58pm
JOe:
The net take home pay of the lower earning spouse after all expenses typically runs in the range of 15-30%. Some of the costs include the obvious: payroll taxes, income taxes, costs of working such as clothing, transportation, more expensive lunches. One of the largest costs is the lost revenue or opporutunity costs of the higher earning spouse who often has to leave work early to take care of kids so he or she can support the lower earning spouse's career. The only real upside of the lower earning spouse continuing to work is maintaining skills and compensation during the time he/she would otherwise be taking care of the kids. This factor generally would only apply to the professional class.
8.6.2007 7:04pm
nunzio:
Back when I was a kid, the "two incomes" were from our Dads' two jobs. When Moms started going to work, Dads quit the second jobs.
8.6.2007 7:07pm
David Chesler (mail) (www):
Not sure why I'm not following all the deconstruction of Warren, but my own life certainly fits with her examples. So as not to compare where I grew up (a 2-bedroom roach-infested apartment in a declining neighborhood, and then an urban renewal co-operative) with my house with its backyard and all, I'll note that after we had a baby and my wife stopped working we bought a house up the street from, and of the same vintage as, the one she'd grown up in. Slightly bigger, slightly less land. She had just paid off the Escort she'd bought before I met her; I had various 10-year-old cars for which I'd paid cash.
With moderate local college degrees, and low-end white collar jobs, our respective fathers were able to save a bit. With an Ivy education and a professional job we had no savings and when I was out of work for 13 months (what shortage of programmers?) we petitioned for Chapter 7 bankruptcy, because we had credit card debt we otherwise wouldn't have got out from under.
Her car cost about $600/year in insurance and a little more in repairs -- even though she wasn't working, she pretty much needed it to get the kids to simple things. (No soccer, no daycare, no pre-school.) Her medical bills were a little higher than typical, but rarely more than $10,000/year and that was tax deductible.
We bought our house for twice what it had cost maybe 5 years earlier, but half what it would have sold for 5 years after that; our mortgage payment was comparable to rent on a smaller place.
We did have basic cable, and of course I'm now using a computer that would have cost millions of dollars in the past. Otherwise I'm not sure how I'm living any more profligately than our parents, but I know I'm not saving like they were.
8.6.2007 7:07pm
nunzio:
DC, "$10,000 a year" is quite a bit in medical expenses. And it only becomes tax deductible when it's more than 7.5% of income. (E.g., if you make $100,000 and you're medical expenses are $10,000, then you get to deduct $2,000).

It sounds like medical expenses are a big part of what drove you into bankruptcy (along with unemployment). This is not uncommon. Good luck.
8.6.2007 7:14pm
JEM:
Re disparities in real-estate values - this has long been the case, but it's grown very dramatically in the past thirty years or so.

Houses where I sit in a generic middle-class SF Bay Area suburb are now worth roughly 25X what they were in 1973. Same lot, same house, just more digits. It's the rare income that's gone up 25X in that time.

The property tax payment alone would be greater than the mortgage payment factored into the authors' example.
8.6.2007 7:24pm
Urijah (mail):
The tax discussion is very confusing--is this all taxes? Payroll, property, state, sales? Just income? Is the 70's example using 70's tax rates?
8.6.2007 7:46pm
Public_Defender (mail):
Given that we're talking about two-income families, it probably makes sense to talk about the tax hit they take in terms of the marital penalty, in which the incomes of a married couple are added, and so result in a higher tax rate than two single people with the same incomes would pay.

This isn't necessarily true. Two-income couples with similar incomes pay a penalty. Two-income couples where one couple makes substantially more than the other get a marriage bonus from the tax system.

Warren and Tiyagi wrote: Thanks in part to Kimberly's extra income, the family has been bumped into a higher bracket, and the government takes 33 percent of the family's money.

Todd Zywicki wrote: And for the 2000s family, paying 33% of its income (a higher rate presumably because of progressivity hitting the second wage-earners income) in taxes works out to be $22,374.

This is false, at least when it comes to federal taxes. A family with a $67K income, a $9K mortgage, and two child deductions would be in the 15% marginal bracket.
8.6.2007 10:49pm
Tax Eaters Anonymous:
Consider that education costs have soared (property taxes), but educational standards have declined. A lot of pay now goes into healthcare, which workers never see. Payroll taxes have increased. The collective have decided that education, healthcare, and money for old people is the most important thing, so we're all forced to pay for it whether we like it or not. Trying to maintain a lifestyle of choice when the state is forcing other choices on you is impossible.

Add in the cultural factors like many households breaking apart, with the costs often falling on the state, young people renting apartments instead of living at home, etc. and it's obvious why no one has any savings. It doesn't matter what tax system you have, we need an across the board 30% cut in government spending.
8.6.2007 10:50pm
Duncan Frissell (mail):
an excessive "bidding war" for housing, as families compete to get their children into preferred school districts.

Then parents who home schooled could buy homes in poor school districts (which, it turns out, are all of them) and make out like bandits.
8.6.2007 10:55pm
Lev:
Todd Zywicki wrote: And for the 2000s family, paying 33% of its income (a higher rate presumably because of progressivity hitting the second wage-earners income) in taxes works out to be $22,374.


This is false, at least when it comes to federal taxes. A family with a $67K income, a $9K mortgage, and two child deductions would be in the 15% marginal bracket.


Maybe it is false, and maybe it isn't. Total tax load includes federal, state, and local income taxes and property taxes...and sales taxes.
8.7.2007 12:37am
Lev:
I have a different issue with respect to the quoted example.


The family buys health insurance through Tom's job, to which they contribute $1,030 a year--the average amount spent by an insured family that made at least some contribution to the cost of a private insurance policy.

Health insurance is another must, and even with Justin's employer picking up a big share of the cost, insurance takes $1,650 from the couple's paychecks.


$1030 a year is about $85 a month. Maybe that was realistic in 1973

$1650 a year is about $138 a month, and I don't believe that is realistic for a family of four these days.
8.7.2007 12:42am
Public_Defender (mail):
Maybe it is false, and maybe it isn't. Total tax load includes federal, state, and local income taxes and property taxes...and sales taxes.

Fair enough, but the original authors were still wrong when they wrote: "Thanks in part to Kimberly's extra income, the family has been bumped into a higher bracket, and the government takes 33 percent of the family's money."

Justin's $39K single income puts him in the 25% tax singles bracket and the 15% married-filing-jointly category. Their $67K income still puts them in the 15% bracket when you factor in their kids and their mortgage.

So, marriage decreased Justin's single marginal tax rate and had no effect on his married marginal tax rate. I don't have time to do the math to see if their overall taxes went up or down.

Again, the "marriage penalty" is really a "marriage bonus" for many couples.

I also question whether many two-income families really need two cars. If they work office jobs in the downtown of a major metropolitan area, a lot of them can take public transportation or find some other way to get to work. They choose to buy two cars because of the status and the convenience. But it's very expensive status and convenience.

The automobile can be an extremely useful tool. It can also be a trap. You buy a car because you "need" it for work. You work because you "need" to make the car payments. Anyone in a two-car family who is financially strained should take a long hard look at the expenses related to that second car to see if they are really worth it.

As to real estate taxes, in my area, homes are worth a lot more in areas with high school property tax rates than in places with low property tax rates. People want good schools, and they pay a premium for it. It goes against the libertarian model, but here, high property taxes increase property values.

Families who can afford to move to high tax/high service communities. Families who can't afford the high tax/high service communities live in low tax/low service communities. (I realize that the calculation is different for empty nesters and the elderly.)
8.7.2007 6:16am
Public_Defender (mail):
Also, sorry for using the word "false" in my first comment. I should have hedged that more and used a term that did not imply dishonesty.
8.7.2007 7:33am
Public_Defender (mail):
My very quick calculation: A $67K couple with 2 kids and the standard deduction would pay $3766 in federal income taxes, an actual rate of 5.6%. Hardly crushing.

I'd love to see how people got to the 33% or 34% total figure for a family with kids.

Caluclation:
$67,000 income
$10,300 standard deduction
$13,200 in exemptions
Taxable income: $43,500
Tax $5,766
$2,000 in child tax credits

Again, this is a quick calculation, and I wouldn't sign that tax return under penalty of perjury without checking it again, but I have to get to work.
8.7.2007 8:07am